Car makers gear up for a tougher China market

BEIJING (Reuters) - China’s massive car market may still be young, but the auto industry CEOs descending on Beijing this week will see first hand that it’s also growing up fast.

The Beijing auto show starts on Monday at a time when China’s auto market has begun softening after a decade of breakneck growth. The days when car sales could surge 46 percent in one year - as they did in 2009 - are gone, say many industry executives and analysts. Most see growth falling off to an average of 7-8 percent this decade.

Unfortunately for car makers, slower growth comes just as new entrants appear in the market and existing competitors add to their offerings.

“There are more brands and more products in China than ever before, and that’s making market conditions suddenly more competitive and tough for everyone,” said Li Shufu, chairman of Zhejiang Geely Holding Group Co. and Sweden’s Volvo, which Geely acquired in 2010.

To be sure, there is plenty of growth left. Even conservative forecasts have China’s auto market surging to 30 million vehicles a year by 2020, from last year’s 18 million. Some think volume could even reach 40 million.

But the signs of a tougher market are clear.

Local Chinese auto makers like Chongqing Changan Automobile Co. and BYD Co. have seen their once-robust profitability erode significantly, thanks to the government’s decision to scrap most of the auto purchase incentives it offered in the wake of the global economic crisis in 2008.

And some global auto makers, notably a Toyota Motor Corp. and Honda Motor Co., also have struggled to sustain high growth.

HARDER TO SELL

Many CEOs come to Beijing on the “continued promise of China” as a market place, Seiji Kuraishi, head of Honda’s China operations, told a small group of reporters in Beijing earlier this month.

“For the most part, including us, top global officials are coming here in hordes because China has become the world’s No. 1 market and its appetite for autos is still growing,” Kuraishi said.

Still, as China’s market matures, there’s no doubt it will get harder to sell cars.

In some cases the market now calls for discounts and other sales incentives, including by once high-flying luxury brands like Daimler AG’s Mercedes-Benz brand, which discounted certain trims of the S-class sedan for a period earlier this year.

The slowdown is poised to make competition even more cutthroat, as new entrants from abroad, including Seat and Alfa Romeo, pile in, while foreign joint ventures add more China-only brands as part of a condition of being allowed to produce here.

“There is a lot of competition in China today; there is a lot of price pressure in China today,” Tim Lee, head of GM’s global operations based in Shanghai, said in Beijing Sunday, referring to sales discounts that eat into profit.

“The market’s certainly becoming more varied in market requirements - there is growing (vehicle) personalization, growing SUVs and growing luxury whereas previously it was more a more basic form of transportation most people perceived China to be,” said Kevin Wale, head of General Motors’ China operations.

“Every trend that has been in the auto world is starting to come to China, and (auto executives) need to show up and see what’s happening.”

FOREIGNERS WELCOME?

Foreign auto makers also confront China’s toughening regulatory environment. Beijing has removed autos from the government’s list of “encouraged” industries, a step widely seen as a sign that China no longer actively promotes or encourages further direct investment in its auto sector from abroad.

Though details are still unavailable, China’s central government also has moved to bar certain government agencies from buying foreign cars, potentially excluding global auto makers from a market that totals between 70 billion and 80 billion yuan ($11.1 billion to $12.7 billion).

Both moves contribute to the feeling that the policymaker’s enthusiasm for foreign car makers is waning.

Joe Hinrichs, Ford Motor Co.’s president for Asia-Pacific and Africa, believes there is “still tremendous support” at provincial and municipality levels, “where a lot of the action really happens” in China.

But “where you might say there’s been a little bit of a backing off, if you will, of the drive to grow the auto industry is at the Beijing level (among central government industrial policymakers),” he said.

It’s not just foreigners who worry about competing, though. The prospect that China’s once red-hot demand for vehicles could register single-digit growth rates for a second year in a row - the slowest back-to-back years since the market took off in the late 1990s - provides plenty for all to fret about.

Surviving is “a live-or-die matter” for Geely and other relatively inexperienced indigenous Chinese auto makers, said Geely’s Li Shufu. But “it’s also difficult for everyone, including foreign auto brands.”